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December 29, 2012

The Right Stimulus

To the Editor: In Jim McTague's Dec. 17 D.C. Current column ("Republicans Stabbed by Business Roundtable") he notes that former Michigan Gov. John Engler, now the Business Roundtable head, stated in 1994 that Clinton and the Democratic Congress were raising taxes and "racking up deficit spending—the very things that hamper job growth," which is the same Republican mantra today.

The Clinton administration presided over the biggest bull market in U.S. history, the longest peacetime economic expansion in U.S. history, created a record 22.2 million new jobs and generated a budget surplus in each of the last three years of the administration. Yet McTague just left the quote from Engler lying there as though it were a true statement.

Barron's should focus on shooting down myths, from the left or the right, and focus on facts. The most fundamental fact confronting our economy is that it is driven by consumer demand. Currently there is woefully inadequate consumer demand for products due to high unemployment and low wages.

The only entity that can create demand other than the consumer is the government. The Republican solution of slashing government spending could not be more off-base. Deficits must take a back seat to government stimulation of the economy with a focus on creating jobs. Richard M. Burnham Madison, Wis.

Powerful Deficits

To the Editor: In the Dec. 17 Other Voices article ("Why Obama is Bearish for Stocks") author Robert Sussman said, "if the second Obama administration can continue trillion-dollar-a-year deficits, the government sector will grow at the expense of the private sector." In reality, government deficits put money into the private sector. When the government sells bonds to finance a deficit, the private sector receives the bonds and it receives lower taxes or the benefits of higher spending. This latter transaction should not be overlooked since it was the reason for the financing in the first place. At the end of this process, nothing has changed for the private sector at the macro level except that it now owns the bonds.

The government's receipts from new debt are spent by the government, increasing GDP, jobs, profits, etc. before it becomes, on a macro flow-of-funds basis, the money that replaces the private-sector funds used to purchase the Treasury bonds. There is no "crowding out."

Standards of Care

To the Editor: As an advisor to private clients for over three decades, I would like to comment on your article about Goldman's private-client group ("Inside Goldman's Private Bank," Penta, Dec. 3). The most obvious fact that differentiates them from their competitors is their ongoing ability to cultivate new business by providing access to products generated by their investment banking and other arms of their organization.

Because their brokers are held to the lower standard of client care to simply "know your client," rather than the fiduciary standard for SEC-registered investment advisors to "always act in the client's best interest," Goldman clients can be steered into GS-backed IPOs and alternative investment pools in which the firm has a financial interest.

As for the "flotilla of experts" mentioned as putting GS ahead of their competition, does the fact that these experts happen to work at GS mean that they also happen to best address each client's needs? Many firms, ours included, have elected to build a national network of independent experts on whom we and our clients can rely for advice to provide best-of-class solutions for estate planning, wealth transfer, philanthropy, and more. Mark Eshman ClearRock Capital Ketchum, Idaho

A Question of Market Share

To the Editor: I would like to thank Garett Jones for reviewing my book, Paying the Price ("Defending the Status Quo," Balancing the Books, Dec. 3). I sympathize with his perspective that my book didn't go into more detail on Fannie Mae and Freddie Mac's role in the Great Recession. That would be a (long) book by itself.

But I take umbrage with his statement that my assessment of Fannie and Freddie's role in that dark time is "woefully inaccurate." There is a reasonable debate regarding the role of Fannie and Freddie, but there is no debate that their share of mortgage lending fell sharply during the height of the housing bubble. Private subprime and alt-A lenders took that market share by lowering their underwriting standards well below those of Fannie and Freddie. Fan and Fred did play a role in the mortgage crisis (and I discuss that in my book), but they weren't the driving force behind it. Mark Zandi Moody's Analytics New York City

Garett Jones replies: Mark Zandi is right that the private sector held the worst of the worst subprime loans and he's right that during the peak years Fannie and Freddie's share of the market fell. But both are just what one would expect to see if Fannie and Freddie inflated a private-sector bubble. When the Federal Reserve buys up Treasuries and borrowing costs fall in the riskier corporate market as a result, no one is surprised. Fannie and Freddie's unprecedented purchases of low- quality loans had a similar effect, making it cheaper to lend to even riskier subprime borrowers. And the GSEs' book size grew throughout the bubble years—while the private sector grew even faster. That's what it means to blow a private-sector bubble and that's what the GSEs did.

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